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Monday, November 10, 2003

Welcome to Satya

Just to say welcome to Satya who runs a blog called Prayatna, and who will be posting here from time to time. Satya has an interest in education, so I have picked an item from his education page by way of presentation.

Economic Times reports on the increase in the number of student loans disbursed by banks (largely the public sector banks) over the past three years.

Bank of India (BoI) saw a jump of 88.2% from 603 in March 2000 to 5,115 in March 2003. The corresponding percentage increase for State Bank of India (SBI), Canara Bank (2001-03), Union Bank of India (2001-03) and Bank of Baroda (BoB) was 55.8%, 61.9%, 79.9% and 66.3% respectively.

The outstanding amount of education loans for SBI rose from Rs 115 crore in March 2000 to Rs 660 crore in March 2003. The corresponding figures in March 2003 for Canara Bank, BoB, BoI and UBI were - Rs 401 crore (Rs 188 crore in FY01), Rs 115.5 crore (Rs 19.8 crore in FY00), Rs 105.8 crore (Rs 27 crore in FY00) and Rs 85.3 crore (Rs 9 crore in FY01). Regarding the actual volume of educational loans, BoI saw a jump from about Rs 2 crore in FY01 to Rs 66.5 crore in March 2003; education loans from Canara Bank rose from Rs 40 crore in FY01 to Rs 158 crore in March 2003; while the corresponding figures for PNB were Rs 34.3 crore in FY01 to Rs 256.6 crore in March 2003.

The education loan market took off with the announcement of new norms for this sector in June 2000. Prior to that, the sector had witnessed sluggish growth. Under the relaxed norms, banks are not expected to demand any security for loans up to Rs 4 lakh, beyond which, collateral security - such as share certificates, government bonds, IVP, KVP, NSC, mortgage of land - is required.

Interest rates have also fallen substantially. From 14% pa in 2000, SBI now charges 10.85% pa up to Rs 4 lakh, and 11.75% pa for loan exceeding this amount. BoI charges 9% pa up to Rs 50,000, and 11.5% pa for educational loans between Rs 50,000 - 15 lakh. Other nationalised banks charge rates ranging from 11-12.5% pa, depending on the loan amount.

Educational loans vis-a-vis retail loans given by banks have also witnessed a substantial jump over the years. In FY01, only 1-2% of BoI's retail loans comprised educational loans, which rose to 9% in March 2003. Educational loans as a percentage of retail loans given by various banks in March 2003 were 3.9% for PNB (1.6% in FY01); BoB 5.5% (3.6%) and UBI 1.7% (0.3%). For SBI, educational loans as a percentage of personal loans given by the bank rose from 1.4% in FY01 to 2.7% in March 2003.

Though the percentage increase over the past few years seems to be substantial, in terms of absolute numbers, the amounts disbursed still seem to number in the hundreds of crores, a very small fraction of the overall retail loans (home, car and other personal loans) disbursed.

Educational loans could help boost higher education in the country without relying on the government to fund or subsidise higher education. Consider the example of an IIT education - the most subsidised education around in the country today. Clearly there is high demand for an IIT education, but the supply is extremely limited due to lack of funding from the government (The University of Roorkee was converted into an IIT and a new IIT was set up in Guwahati recently, but that's far from enough to meet the demand).
Here's what can be done.

- Let the IITs raise their fees to more realistic levels to recover at least the annual operating costs from the student fees.

- Let every student who is unable to pay the fees be given an educational loan at an interest rate on par with the home loan interest rate, if not lower, with only simple interest charged for the duration of the study and the payback beginning as soon as the student lands the first job.

- Every student graduating from IIT has good job prospects and can certainly hope to pay back the loan.

- An outstanding loan is also likely to help by making students take their education more seriously.

Private sector investment to set up more IITs or similar institutions will become more attractive since the operational costs can be recovered immediately and so the supply of higher education can increase without government subsidies. The government can then direct all the funds that were going to higher education towards funding primary education.

Just like housing loans, where the default rate is said to be extremely low (there is sound collateral and housing is a fundamental need), the default rate on education loans is also likely to be very low since education is also a fundamental need. One could also look at legislating that every employee has to give an undertaking to his/her employer at the start of employment declaring if there is any outstanding education loan and if there is, part of the salary can go towards paying off the loan.

Educational loans could also be an excellent new growth area for banks and other lenders especially during times of economic downturn when uptake of other loans may be on the lower side due to drop in consumer demand, since a downturn is typically the time when people consider going in for further studies due to a shrinking job market. The banks can also start building a strong customer relationship with the student community from a very early stage.

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